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CCH can assist you with stories, including interviews with CCH subject experts. Also, the 2013
CCH Whole Ball of Tax
is available in print. Please contact:
 
Leslie Bonacum
(847) 267-7153
mediahelp@cch.com
 
Eric Scott
(847) 267-2179
eric.scott@wolterskluwer.com
 
Brenda Au
(847) 267-2046
brenda.au@wolterskluwer.com

Visit the CCH Whole Ball of Tax site often as new releases and other updates will be posted
throughout the tax season.

CCH provides special CCH Tax Briefings on key topics at CCHGroup.com/Legislation.

 
2013 CCH Whole Ball of Tax
Release (21) | Back to WBOT

2013 CCH Whole Ball of Tax

Contact:
Leslie Bonacum
, 847-267-7153, mediahelp@cch.com
Eric Scott , 847-267-2179, eric.scott@wolterskluwer.com
Brenda Au , 847-267-2046, brenda.au@wolterskluwer.com

Education Tax Breaks Tardy But Present, Reports CCH

Last-minute Law Restores Many Expired Provisions for Students, Teachers, Parents

When it comes to education tax breaks, Congress was late in addressing many of the expiring tax provisions for 2012 and 2013, but they were finally extended as part of the American Taxpayer Relief Act of 2012 (ATRA), signed into law January 3, according to CCH, a Wolters Kluwer business and a leading global provider of tax, accounting and audit information, software and services (CCHGroup.com).

Among the education tax incentives being extended that had been set to expire after the 2011 tax year are the Tuition and Fees and Teacher’s Classroom Expense deductions, which are taken as above-the-line deductions.

Additionally, others set to expire or be significantly diminished after 2013 were given new life as part of the ATRA, including the American Opportunity (modified Hope) Tax Credit, student loan interest deductions, Coverdell Education Savings Account, employee assistance and scholarship funds.

Below, CCH compares the rules and added incentives under the ATRA for the more popular tax credits, deductions and exclusions as well as tax treatment for education savings plans, including 529s, for 2012 and 2013.

Tax Credits

The American Opportunity Tax Credit (AOTC), providing up to a $2,500 credit, was set to expire after 2012 leaving the less generous Hope Scholarship Credit, which is only available for the first two years of college. The AOTC has now been extended through 2017.

American Opportunity Tax Credit

Lifetime Learning Credit

What it is

An enhanced Hope Credit of up to $2,500 per student per year for the first four years of post-secondary qualified tuition and expenses.

A credit of up to $2,000 per return based on expenses for post-secondary education or courses to improve job skills.

Credit amount

100% of the first $2,000 of qualified tuition and related expenses plus 25% of the next $2,000. Use Form 8863, Education Credits.

20% of the first $10,000 in qualifying expenses, to a maximum $2,000 credit. Use Form 8863, Education Credits.

Qualifying expenses

Qualified tuition and related expenses, including expenditures for course materials, such as books, supplies and equipment.

Tuition, student activity fees and course-related fees paid directly to the educational institution.

Credit phaseout ranges

Modified adjusted gross income (AGI) is $80,000-$90,000 for single filers, $160,000-$180,000 for joint returns.
 
Up to 40% of the credit amount is refundable if the taxpayer’s tax liability is insufficient to offset the nonrefundable credit amount.

These numbers are not subject to inflation adjustment.

Modified AGI increases to $53,000-$62,000 for single filers for 2013 (was $52,000-$62,000 for 2012) and $107,000-$127,000 for joint returns for 2013 (was $104,000-$124,000 for 2012).

Who can/can’t claim it

Can’t be taken if married filing separately.

Can’t be taken by student claimed as dependent child on another person’s return, but parent can claim credit for paying dependent child’s expenses.

Student must be enrolled in program leading to degree or other recognized credential, studying at least half-time.

Can’t be used for graduate or professional level programs or by anyone with a felony conviction for a state or federal drug offense.

Cannot be claimed by the student if he or she has unearned income subject to the “kiddie tax.”

Can’t be taken if married filing separately.

Can’t be taken by a student if claimed as dependent child on another person’s return, but parent can claim credit for paying dependent child’s expenses.

What to watch out for

Can’t be taken if Lifetime Learning Credit or tuition and fees deduction is taken for the same student.

Can’t be taken if American Opportunity Tax Credit or tuition and fees deduction is taken for the same student.

Can be taken in same year as a distribution from a Coverdell Educational Savings Account (Coverdell ESA) or qualified tuition program (529 plan), but not for same expenses.

Can be taken for expenses paid for with student loan.

Credit applies per return.

'Above-the-line' Deductions

Had Congress not acted, both the Tuition and Related Fees and the Teacher's Classroom Expense deductions would not have been available for tax years 2012 onward. Both are now available through 2013. The ATRA also allows students to claim the loan interest deduction over more time and at higher income levels as well as to deduct for voluntary interest payments.

Tuition and Fees Deduction

Student Loan Interest Deduction

Teacher’s Classroom Expense Deduction

What it is

A deduction from gross income of up to $4,000 ($2,000 if modified AGI exceeds $65,000) based on expenses for post-secondary education.

A deduction from gross income of up to $2,500 based on interest paid on a student loan for post-secondary education.

This deduction would only have been allowed to be claimed for the first 60 months of the required payments starting in 2013. Under the ATRA, this rule was permanently suspended.

The ability for teachers to take an above-the-line deduction based on amounts they spend for unreimbursed classroom expenses.

Under the ATRA, now available for both 2012 and 2013.

Deduction amount

100% of the first $4,000 ($2,000 if modified AGI exceeds $65,000 for single filers ($130,000 for joint filers) in qualifying expenses.
Taken on Form 1040A or 1040.

100% of the first $2,500 in qualifying expenses.

Taken on Form 1040A or 1040.

100% of the first $250 in qualifying expenses ($500 for joint filers who are both qualified educators).
Taken on Form 1040A or 1040.

Qualifying expenses

Tuition, student activity fees and course-related fees paid directly to the educational institution.

Loan may cover books, supplies, equipment, room and board, transportation and other necessary expenses in addition to tuition, student activity fees and course-related fees paid directly to the educational institution. Interest payments are deductible for the entire period of the loan.

Unreimbursed expenses in connection with books, supplies, computer equipment and supplementary materials used in the classroom.

Deduction phaseout ranges

Full deduction is only allowed if modified AGI is not greater than $65,000 for a single filer, $130,000 for joint filers.

Taxpayers whose income exceeds that limit but does not exceed $80,000 for a single filer or $160,000 for joint filers may deduct up to $2,000 in qualified expenses in 2012.

For both 2012 and 2013, modified AGI is $60,000-$75,000 for a single filer, $125,000-$155,000 for joint filers.

 

No income limitations.

Who can/can’t claim it

Can be taken by qualifying individuals including themselves, a spouse or a dependent.

Can’t be taken if married filing separately.

Can’t be taken if claimed as dependent on another person’s return, but parent can claim credit for child’s expenses.

The ATRA allows the deduction to be taken even for voluntary payment of interest.

Must have been in degree program and at least half-time student to take the deduction.

Can’t be taken if married filing separately.

Can’t be taken if claimed as dependent on another person’s return.

Can be taken only by the person who is responsible for the loan and who actually makes the payments.

Can be taken only by teachers, instructors, counselors, principals and aides who work for at least 900 hours during a school year in a school that provides elementary or secondary education as determined by state law.

What to watch out for

Can’t be taken if AOTC or Lifetime Learning Credit is taken for the same student.

Can be taken in same year as a distribution from a Coverdell ESA or qualified tuition program but not for same expenses.

Can be taken for expenses paid for with student loan.

Deduction is not available on Form 1040EZ.

Deduction is taken on Form 8917, Tuition and Fees Deduction.

Must reduce qualified educational expenses by the total amount paid through tax-free sources such as tax-free withdrawals from Coverdell ESAs.

Deduction is not available on Form 1040EZ.

Non-athletic supplies for courses in health or physical education do not qualify.

Expenses that exceed $250 and non-classroom supplies may be deducted as an employment-related miscellaneous itemized deduction subject to the 2% floor for taxpayers who itemize.

Deduction is not available on Form 1040EZ.

The Educator Expense Deduction is claimed on Form 1040, Line 23, and Form 1040A, Line 16.

Savings Vehicles

Under the ATRA, the $2,000 contribution level for Coverdell Education Savings Accounts (Coverdell ESA) was made permanent. Had this not occurred, the contribution level would have reverted to $500 in 2013.

Coverdell Education Savings Account (ESA)

Qualified Tuition Program (529 Plans)

What it is

A savings account for educational expenses in which earnings grow tax-free. Withdrawals also are tax-free if used to pay for qualified educational expenses.

Three general types of 529 plans exist:

  • Pre-paid tuition plans – generally guaranteeing future tuition coverage at a state university.
  • State 529 college savings plans – generally sponsored by a state, allowing you to use saving plan proceeds to attend a state or private university.
  • Independent 529 plans – sponsored by a consortium of private colleges, whereby you can lock in current tuition rates for future years at participating schools.

In each savings program, investment earnings are not taxed if withdrawals are used for qualified expenses.

Contributions to state-sponsored programs are partially or fully deductible on some state tax returns.

Contribution limits

The ATRA makes permanent the $2,000 maximum annual contribution per year per beneficiary.

As with IRAs, contribution can be made up to the tax filing deadline, which for 2012 returns is April 15, 2012.

Can contribute to both a Coverdell ESA and a qualified tuition plan in the same year.

Absent further legislation, the maximum contribution for the 2013 tax year will be $500.

Contributions cannot be more than is necessary to provide for the higher education expenses of the beneficiary. These amounts are set by the state or educational institutions sponsoring the plan and may be in excess of $300,000. In the case of many 529s, accounts can be opened with as little as $25 and contributions as little as $15 per pay period.

There are no other specific annual contribution limits for the plans.

Qualifying expenses

Can be used to pay for tuition, fees, books, supplies and equipment for both K-12 and post-secondary.

For K-12, can also pay for uniforms, transportation, supplementary items and services such as extended day programs, room and board, and purchase of computer technology and Internet access (but cannot be used for sports, games or hobby software unless it is predominantly educational).

For post-secondary education, can cover expenses for room and board if the student is enrolled at least half-time and the amount meets certain guidelines. Can also be used to fund a qualified tuition program.

Distributions can be used for accredited post-secondary books, supplies, equipment, room and board, transportation and other necessary expenses in addition to tuition, and student activity fees and course-related fees paid directly to the accredited post-secondary educational institution.

Expenses related to the cost of computer equipment, technology or Internet access are not considered qualifying expenses for excluding qualified tuition plan distributions from gross income.

Contribution phaseout ranges

The phaseout ranges from modified AGI of $95,000-$110,000 for single filers, $190,000-$220,000 for joint filers; no phaseout for corporation or other entities, including tax-exempt organizations. These numbers are not subject to inflation adjustment.

No income limitations.

Who can/can’t claim it

Beneficiary must be younger than 18 years old or be a special needs beneficiary in the year contributions are made.

Anyone can set up an account for a beneficiary as long as the annual contribution limits for that beneficiary are not exceeded.
 

Someone funding a qualified tuition program for another individual can use the annual gift tax exclusion ($13,000 for single filers or $26,000 for joint filers for 2012; $14,000 and $28,000 for 2013, respectively) or combine five years’ worth of exclusions in a single year. The beneficiary can exclude funds withdrawn from the qualified program from income if they are used for qualified expenses.

What to watch out for

Beneficiary is taxed on any withdrawals not used to pay for qualified educational expenses. (Penalty-free withdrawals can be made in connection with service academy appointments, such as Annapolis or West Point.)

All funds must be withdrawn by the time beneficiary reaches age 30 (except if special needs individual), but an account can be transferred from one beneficiary to another.

All contributions must be made in cash.

As with a conventional IRA, owner of the account can exercise wide discretion as to investments. The funds, however, cannot be used to reimburse the taxpayer for home schooling.

Check tax treatment of contributions for state income tax purposes.

Limited ability to change investment options.

Possible 10% penalty if distributions are not used for qualified expenses.

Beneficiary can be changed if new beneficiary is a member of the same family.

In the case of the Independent 529 plans, if your child does not attend a member college and you either withdraw the money or transfer it to a state-run plan, you won’t be able to collect more than a 2% gain on the money you invested – even if the return realized was in excess of this.

Penalty-free withdrawals can be made in connection with service academy appointments, such as Annapolis or West Point.

 Exclusions

Several exclusions also are available for taxpayers related to education. Exclusions include:

  • Bond interest: All or part of the interest on proceeds of qualified savings bonds (specifically, Series I bonds or qualified Series EE bonds issued after 1989) cashed to pay education expenses. For 2012, modified AGI eligibility phaseout ranges are $72,850-$87,850 for single filers, $109,250-$139,250 for joint returns; and increase for 2013 to $74,700-$89,700 for single filers, $112,500-$142,050 for joint returns.
  • Employer assistance: For 2012, employer-provided educational assistance (up to $5,250 annually) can be excluded from income for undergraduate or graduate level coursework and expenses. Set to expire after 2012, the ATRA makes this tax break permanent for 2013 and beyond.
  • Scholarship funds: Scholarship money or tuition reduction from income up to the amount spent on qualified expenses; generally cannot claim exclusion if scholarship or tuition reduction represents payment for teaching, research or other services.
  • The ATRA makes permanent the exclusion for Armed Forces and National Health Service Corps scholarship programs which had been set to expire after 2012.

  • Student loans: The amount of a cancelled student loan is also excluded from gross income. (Normally, a cancellation of indebtedness counts as income.) The discharge must be made under the terms of a loan agreement and made because the person works for a specified period in certain professions for certain kinds of employers – for example, as a doctor or nurse in underserved areas.

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nb-113-25

SOURCE: Wolters Kluwer, CCH: 2013

Permission for use granted.

       


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